OECD leading indices weak but reviving

The OECD’s leading indices for October, released today, provide further evidence that global economic weakness is abating, consistent with faster real money supply expansion since the spring.

Confirmation of the message from monetary trends is sought here from a global leading indicator derived from OECD country indices covering the G7 and emerging “E7” economies. This indicator bottomed in July and turned positive in October for the first time since March. The July trough follows a May low in six-month real narrow money supply expansion.

The indicator, admittedly, is recovering from a depressed level, suggesting that economic news will remain weak in the short term while the incipient upswing is vulnerable to negative “shocks”. Changes in trend, however, tend to be sustained and the monetary backdrop is still supportive, with real money expansion likely to be bolstered by a further slowdown in inflation and central bank easing.

The recovery in the indicator initially reflected E7 improvement but the G7 component has revived from a low in August, though remains weak.

The US is doing best within the G7, consistent with monetary developments and a recent pick-up in the ISM manufacturing new orders index.

The Mexican indicator often provides a lead on the US and remained strong in October, suggesting further US improvement.

The Chinese indicator moved sideways in October following a recovery, consistent with industrial growth stabilising at a moderate pace.

Simon Ward is Henderson's chief economist. He has worked as an economist in financial markets for over 20 years and believes that changes in monetary conditions are a key driver of both the economic cycle and movements in financial markets; accordingly, a forecasting approach emphasising monetary analysis has a better chance of success.